Stock prices and long-run demand for money: evidence from Malaysia

This paper investigates the money demand function for Malaysia in the 1971-1996 period using the multivariate cointegration and error correction model methodology. The results suggest that a stable long-run relationship exist between real M2, the interest rate differential, income and stock prices. Stock prices have a significant negative substitute effect on long-run as well as short-run broad-money demand (M2) and its omission can lead to serious misspecification in the money demand function. The analysis from the vector error correction model (VECM) and the Toda & Yamamoto (1995) causality tests find that money is endogenous and that there is at least a unidirectional relationship between stock prices and real M2. Stock prices Granger cause real M2 indirectly through income between interest rates and stock prices and stock prices and money stock. This paper comes to the conclusion that due to the endogeneity of money, M2 cannot be completely controlled by Malaysia's central bank. Therefore, in formulating future monetary policy, the response of money demand to stock prices should be considered.     

Unanticipated money,output, employment and prices in a develoing economy: the korean case

This paper examines the effect of unanticipated money on output, unemployment and prices in Korea. The empirical results tend to reject the policy ineffectiveness proposition (PIP) in most cases. They show that both anticipated and unantipated money affect output and prices, in contract with the PIP. Mixed results are obtained for the effect of monetary variables on unemployment. The statistical results show that the regular OLS two step estimates yield t values which are upward biases by 0–27% as compared with the consistent estimates of the variance-covariance matrix that are obtained in this study. [E 51]     

Permanent prices,expected price changes,and the demand for money

This paper investigates the empirical validity of the distinction between measured and permanent prices for cash balance decisions. The use of permanent prices has been advocated by Friedman over twenty five years ago, but the idea has received little attention in the literature. Using Canadian quarterly data, we find that the permanent price hypothesis yields meaningful estimates of the demand for money, but it does not appear to contribute significantly to our understanding of cash balance decisions. A number of assumptions about the relationship between the elasticities of income, price, and price change expectations are tested as well.     

Delivering endogenous inertia in prices and output

This paper presents a DGE model in which aggregate price level inertia is generated endogenously by the optimizing behavior of price-setting firms. All the usual sources of inertia are absent here i.e., all firms are simultaneously free to change their price once every period and face no adjustment costs in doing so. Despite this, the model generates persistent movements in aggregate output and inflation in response to a nominal shock. Two modifications of a standard one-quarter pre-set pricing model deliver these results: learning-by-doing and habit formation in leisure. While the model delivers persistence, simulations based on estimated shocks to tfp and money growth suggest both output and inflation are too volatile relative to the data and fail to closely follow the historical time series.     

Omitted variables in equations relating prices to money

This paper considers some of the conditions under which an estimated ‘reduced form’ equation relating retail prices solely to past values of sterling M3 would provide a reliable guide to the past relationship between these two variables. The equation does not appear to be biased by innovations in real output. However, when overseas variables are included in the reduced form the estimated relationship between money an prices chages significantly. This suggests that the estimated parameters in a price equation based on money alone suffer form omitted variable bias.     

Stock prices and money velocity: a multi-country analysis

What kind of information do stock prices offer for predicting velocity? This paper develops previous work by Milton Friedman for the US economy and shows that in a panel of 25 countries a wealth effect derived from the stock market has negatively influenced the ratio of nominal income to a broad definition of money. Taking quarterly data for the period 1961–1998, the relationship holds in Japan, the UK and Switzerland; in Italy a substitution effect (away from money) has also been operating. Overall, these empirical findings indicate the presence of systematic influences of stock price fluctuations on money velocity and suggest that the repercussions of asset inflation and deflation on the behavior of monetary aggregates should be monitored. First version received: July 1998/Final version received: November 2000     

Stock prices, inflation and output: Evidence from wavelet analysis

The negative relationship between real stock return and inflation puzzled many as it contradicts conventional Fisherian wisdom. Fama [Fama, E.F. (1981), “Stock returns, real activity, inflation and money”, American Economic Review, 71(September), 545–564.] gave an explanation for this negative relationship with two propositions that links real stock return and inflation through real output. This study revisits Fama's hypothesis for India in the post-liberalized period from a developing country perspective. Examining this relationship on the time-scale decomposition from a wavelet multi-resolution analysis suggests that Fama's hypothesis holds only for the long time scale and remains as a puzzle for the other time scales.     

Inflation uncertainty, growth uncertainty, oil prices, and output growth in the UK

This study examines the transmission and response of inflation uncertainty and output uncertainty on inflation and output growth in the UK using a bi-variate EGARCH model. Results suggest that inflation uncertainty has positive and significant effects on inflation before the inflation-targeting period, but that the effect is significantly negative after the inflation-targeting period. On the other hand, output uncertainty has a negative and significant effect on inflation and a positive effect on growth, while oil price rises significantly increase inflation for the UK. Results also indicate that inflation uncertainty significantly reduces output growth before and after the inflation-targeting period. These findings are robust and the Generalized impulse response functions corroborate the conclusions. These results have important implications for an inflation-targeting monetary policy, and for stabilization policy in general.     

Anticipated and unanticipated money: a case study of Malaysia

The paper tests the LSW proposition that unanticipated policy changes affect real economic variables by using Malaysian data over the period 1970:1–1990:4. The empirical evidence changes in fiscal policy and balance of payments do not affect real output, thus lending support to the proposition. On the other hand, anticipated monetary policy and inflation influence output in the short-run, lending support to Mishkin's views of the economy and rejecting the LSW proposition. In addition, the long-run neutrality proposition is not supported by the data. Moreover, unanticipated changes in inflation do influence real output in the short-run lending support to the LSW proposition. However, unanticipated changes in monetary policy, balance of payments and fiscal policy do not influence real output, lending support to the classical view of the economy and rejecting the LSW proposition. Furthermore, the Monetarist's view that inflation is a monetary phenomenon is rejected. The findings also show that unanticipated movements of money supply contribute significantly to the inflation rate. The Chow test shows that the coefficients remain stable over the period of study.     

A causal caveat in the Australian money/income relation

The nature of Australian causal relations between money and nominal income and money and real income is examined. Like other recent studies in the area causality is in the sense of Granger (1969). Unlike other studies, causality conclusions are based on both a within-and post-sample analysis. This is motivated by Granger's(1980) recent suggestions regarding causality detection. Monetary growth is found to lead both real and nominal income growth by six months. Surprisingly, the post-sample forecasting analysis suggests real income rather than nominal income as the more relevant causal variable as far as monetary growth is concerned. The identified lag here is fifteen months.     

The causal dynamics between renewable energy,real GDP,emissions and oil prices: evidence from OECD countries

This study extends the empirical literature on the determinants of renewable energy consumption in the case of 25 OECD countries for the period 1980–2011. Preliminary analysis suggests the presence of cross-sectional dependence within the panel data. As a result, second-generation panel unit root tests of Smith et al. (2004) and Pesaran (2007) are undertaken to find the respective variables that are integrated of order one. Panel cointegration and error correction modelling reveal that a long-run relationship exists between renewable energy consumption per capita, real GDP per capita, carbon dioxide emissions per capita and real oil prices. The long-run elasticity estimates are positive and statistically significant for real GDP per capita, carbon dioxide emissions per capita and real oil prices. The panel error correction model shows that a feedback relationship exists among the variables.     

Dynamics of money, output and price interaction — some Indian evidence

The present study is an attempt to model the dynamic interactions between money, output and prices in a structural vector autoregression framework. The primary concern of the paper is to examine the sources of variations and response of one variable to changes in others in a system of economic variables in the Indian context. Using quarterly data from 1970Q1 to 1990Q4, we find that structural factors, in addition to monetary factors, play an important role in generating and sustaining the process of inflation and fluctuations in economic activity. An increase in money/credit supply is found to increase output and prices in the short-run and prices in the long-run, while a non-accommodating monetary policy is ineffective in controlling inflation even at the cost of substantial output losses, thereby indicating relative rigidities in price movements. Another interesting finding is that the monetary authority responds differently to different price shocks, exercising its leverage in altering the quantity as well as the composition of aggregate money supply. Our findings also indicate that the economy is characterized by relatively large and infrequent shocks to ‘price/cost’-related factors. Finally, our analysis suggests that a simple monetary targeting without adequate ‘supply side’ measures may not be able to serve the objective of maintaining growth with price stability.     

Cointegration and causal relationships among steel prices of Mainland China, Taiwan, and USA in the presence of multiple structural changes

Variation in the price of steel is an important factor to take into consideration when discussing cost control and management decisions in the construction industry. We employ various conventional and advanced econometrics methods to examine the interrelationships of steel prices in three related markets during the time period June 2002 to May 2010: Mainland China (CH), Taiwan (TW), and the United States (US). We adopt the Gregory and Hansen (GH) test and regime-switching (RS) model for cointegration, both of which accommodate endogenous structural break(s), to produce a more accurate analysis of a period in the presence of structural change(s). The empirical result of the RS cointegration test with respect to multiple structural breaks suggests a long-run equilibrium relationship among the three variables considered. This finding differs from the result of the GH test but confirms the result of the conventional Johansen test. Furthermore, the results of the Granger causality test indicate that both CH and US steel prices have great influence on the TW steel price; the Taiwanese steel market is closely linked with China and US steel markets in the long run.     

Consumer prices,wholesale prices,and causality

This paper uses the Wald variant of the Granger direct causality test recently prescribed by Geweke, Meese, and Dent (1983) to assess the causal nature of the pairwise relationship between U.S. consumer and wholesale (producer) prices. For the sample period, January 1947 to December 1983, as well as for the two sample subperiods, January 1947 to June 1971 and May 1974 to December 1983, the test reveal that bidirectional causality, or feedback, exists between monthly observations on seasonally unadjusted consumer and wholesale price changes. The finding of bidirectional causality corroborates other empirical evidence suggesthing that a simultaneous equation approach represents the appropriate way to estimate a bivariate model that consists of consumer and wholesale prices.     

Limited participation,private money,and credit in a spatial model of money

Summary. The purpose of this paper is to explore the implications of private money issue for the effects of monetary policy, for optimal policy, and for the role of fiat money. A locational model is constructed which gives an explicit account of the role for money and credit, and for limited financial market participation. When private money issue is prohibited, there is a liquidity effect as the result of a money injection from the central bank, but this effect goes away when private money is permitted. Private money issue changes dramatically the nature of optimal monetary policy. With private money, fiat currency is no longer used in transactions involving goods, but currency and central bank reserves play an important part in the clearing and settlement of private money returned for redemption.Received: 5 May 2003, Revised: 1 December 2003JEL Classification Numbers: E4, E5.The author thanks seminar participants at the Federal Reserve Bank of Richmond and Duke University, conference participants at the Texas Monetary Conference at U.T. Austin, February 2002, and the Conference on Recent Developments in Money and Finance at Purdue University, May 2003, as well as Gabriele Camera, Ed Nosal, Will Roberds, and two anonymous referees for their helpful comments and suggestions.     

Habit formation in state-dependent pricing models: Implications for the dynamics of output and prices

This paper examines the role of habit formation in a standard state-dependent pricing (SDP) model. Incorporating habit formation helps the SDP model to generate hump-shaped and more persistent output responses under a monetary shock. More importantly, incorporating habit formation causes dramatic changes in firm-level pricing behaviors and, as a result, the aggregate price index.